How to Refinance Student Loans with Bad Credit
Refinancing student loans can earn borrowers a lower interest rate and the convenience of one monthly payment. However, refinanced loans have eligibility requirements regarding credit scores. Refinancing and consolidating student loans with bad credit isn’t impossible, though. Continue reading to learn more about how to refinance student loans with bad credit!
What is refinancing?
Refinancing allows borrowers to trade multiple student loans for a single private loan from a bank or similar company. The private lender will pay off the existing loans and give the borrower a new one that combines the loan values. Refinancing can be used on private student loans, federal student loans, or both.
Refinancing is useful because it gives the borrower the convenience of making one monthly payment on one loan instead of multiple. Borrowers can also receive a lower interest rate on the new loan.
In order to refinance student loans, you need to have good credit. Most lenders require a minimum credit score of between 650 – 680. If you don’t meet the credit requirements, you have a few options.
Each refinancing lender has its own eligibility requirements. If your credit score isn’t high enough to refinance with one company, it may be accepted by another. There may be other factors, such as income, that make you eligible for one lender but not another. For example, Earnest has a minimum credit score of 650, but no income requirements.
Compare lenders to find the most suitable refinancing company for your situation. You may also find a better interest rate by doing this!
Improve your credit score
Instead of taking out another loan, it might be best to spend time improving your credit score. A higher credit score can earn applicants a better interest rate. Credit scores can be improved by paying off other debts and keeping a low debt-to-income ratio. For example, paying a credit card bill on time and in full can improve your credit. So can making payments on your student loans.
Another way to improve your credit score is to raise your income. This will lower the debt-to-income ratio. Take on a side job or pursue a higher-paying job while working to improve your credit score.
You can check your credit report from each of the major lenders–TransUnion, Equifax, and Experian–once per year for free. Checking your credit report will help you keep track of your debts and your debt-to-income ratio.
See also: How Do Student Loans Affect Credit?
Use a co-signer
If the applicant doesn’t have a good enough credit score to refinance, they can use a co-signer. This will make an applicant with poor credit more likely to be accepted. A creditworthy co-signer can also earn the borrower a lower interest rate.
A co-signer is a person, other than the student borrower, who agrees to take on equal responsibility for the repayment of a loan. The refinanced loan will appear on both the primary borrower and co-signer’s credit reports. This means the loan can affect both people positively and negatively. The co-signer must have excellent credit and a steady income.
See also: How to find a cosigner
Consider other options
If you have federal loans, there are options to consider before refinancing. If you are refinancing to lower your payments, consider enrolling in an income-driven repayment plan (IDR). There are 4 IDRs offered by the Department of Education. Each of these plans base monthly payments on the borrower’s income. If you have a lower income, an IDR can get you lower monthly payments.
Another option for federal loans is consolidation. This allows borrowers to combine their federal loans into a new, single federal Direct Consolidation Loan. If you are looking for the convenience of having one monthly payment and have federal loans, consolidation is a good option. Consolidation comes with more benefits than refinancing. For example, you can choose to repay your Direct Consolidation Loan on an IDR. Consolidation has no credit requirements.
Do your research!
If you’re looking into refinancing and/or consolidating student loans with bad credit, don’t be deterred! If you do your research, budget wisely, or seek out a co-signer, you can be eligible for a refinanced student loan!